Monday 2 January 2023

ManuLife Valuation Loss, How about PRIME and Keppel Pac REIT?

Shortly after I had posted my previous write up, ManuLife announced a dreaded news that it has written down 10.9% of its asset value and is now at 49% leverage ratio, just shy of breaching the MAS regulatory limit of 50%.

The other 2 who has not announced the dreaded news are PRIME and Keppel (KORE). On context, the gearing for PRIME and KORE are 38.7% and 37.5% respectively. In my view, KORE is likely to report the larger of the writedowns and PRIME will become the least leveraged (and probably the safest US office REIT). Below is the main reason

Keppel has higher concentration risk in one city that is not doing well

Source: KORE AR (see page 65)

49% of KORE's asset value are concentrated in the city of Seattle. Among the cities, Seattle is not part of the sunbelt cities witnessing a resumption of return to office and increase in demand of office space (see Keppel Slides's page 17). What Keppel has omitted to present is that due to its property concentration in Seattle, their overall property valuation is affected adversely and probably to a larger extent than PRIME's.

Source: PRIME AR (see page 15)

Prime's portfoilo is more geographically diversified across USA with no city having a concentration of more than 20%. 

Hence I expect in the rounds of revaluation to come, barring any equity raising or private placement, PRIME REIT will become the lowest leveraged among the 3 US office REITs. All 3 REITs including ManuLife will be at the 43-50% leverage limit. As long as they don't buy more properties, PRIME and KORE unitholders should not see further equity raising. I reiterate among the 3, the risk of unitholders needing to fork out cash is as follows (from highest to lowest):

ManuLife > Keppel (KORE) > PRIME

What is Keppel's Advantage?

One thing advantegous to KORE is that its earliest debt maturity is end 2024 with only 13% of loans to renew by end 2024. PRIME on the other hand has 67% due in July 2024. Hence PRIME will have to pay a higher interest financing about 3 year earlier than KORE, assuming interest rates stay elevated in end July 2024 

This would affect the dividends unitholders receive but does not affect the event of requiring equity raising or private placement, which would dilute unitholders

<Author is vested in PRIME REIT>

1 comment:

  1. all the best choon yuan. agree with what you said.